What is other comprehensive income?
Other comprehensive income (OCI) are income and expenses recognised outside of profit or loss, as required by particular IFRS Standards. Income and expenses are taken to OCI only if there is more relevant information or faithful representation of financial statements to the users.
In a financial statement, other comprehensive income summarises all unrecognised gains and losses affecting a company's equity during the reporting period.
It is essential to understand this concept because it can provide valuable insights into a company's overall financial health.
For example, suppose there are large fluctuations in other comprehensive income from one year to the next. In that case, it could indicate something wrong with the business. Investors and analysts will often closely scrutinise this line item to better understand what's happening with a company.
The most common example of other comprehensive income is a revaluation surplus which arises when an entity decides to account for an increase in the value of land and buildings.
Entity A owns land and buildings that are accounted for using the revaluation model in IAS 16 Property, Plant and Equipment. Entity A revalued these assets from $350 million to $400 million at the reporting date. IAS 16 stipulates that the $50 million gain must be recognised in other comprehensive income.
Statement of financial position:
Dr Non-current asset – land $50 Million
Cr Revaluation surplus (within equity) $50 million
Criticism of OCI
-Many users ignore OCI since the gains and losses reported are unrelated to an entity's trading cash flows. As a result, material expenses presented in OCI may not be given the attention they require.
- Reclassification from OCI to profit or loss results in profits or losses being recorded in a different period from the change in the related asset or liability. This contradicts the definitions of income and expenses in the conceptual Framework.
List of accounting standards under IFRS impacting OCI
- Equity instruments are measured at fair value through other comprehensive income (FVOCI) (if shares are not held for trading) under IFRS 9.
- Revaluation gains as per IAS 16 are credited to the revaluation surplus. The revaluation gain is shown as other comprehensive income.
- Foreign currency exchange gains and losses arising from the consolidation of a foreign operation are reported in other comprehensive income (OCI).
- Remeasurement of actuarial gains or losses on long-term employee benefits is charged or credited to other comprehensive income.
Examples of Disclosure of OCI
Other suggested reading to improve concepts on accounting